Few aspects of hedge fund due diligence deserve more attention – and receive less – than cash management. Historically, fund managers and investors have focused their evaluations on other, more glamorous parts of a fund’s assets and operation. For some funds, cash balances often represent a substantial percentage of the fund’s total assets. For others, the cash component may be a less significant percentage of the total. In every case, however, it is imperative that fund managers – and their investors – know at all times where that money is being held, the safeguards in place for those cash balances and the investment returns those balances are generating.
Making certain that a fund’s unencumbered cash assets are kept as safe and secure as possible should be among a fund manager’s most important responsibilities. This has been underscored by the separate pronouncements in early 2009 by three highly respected and objective third parties, for each of whom alternative investments are a realm of proven expertise.
In January 2010, the Asset Managers’ Committee of The President’s Working Group delivered its “Best Practices for the Hedge Fund Industry”. Among its many recommendations, this report instructed fund managers to:
- be aware of the risks of holding certain short-term cash-like instruments (such as money market investments and short-term securities that depend on a liquidity put) as a substitute for cash, given the potential for illiquidity in these cash-like products
- consider opening cash and custody accounts at financial institutions other than its prime brokers
In March 2009, the Managed Funds Association released its 2009 edition of “Sound Practices for Hedge Fund Managers” which also exhorted fund managers to open cash and custody accounts at financial institutions other than its prime brokers, so as to increase access to liquidity while diversifying counterparty risk.
In April 2010, Casey, Quirk & Associates, a consulting firm with 40+ years of experience advising investment management companies, in concert with The Bank of New York Mellon released a whitepaper, “The Hedge Fund of Tomorrow: Building an Enduring Firm” which observes that, if hedge funds are to continue to prosper, they must:
- turn to independent, non-conflicted third parties for a host of functions that were previously handled by prime brokers and in-house operations. Among these: reconciliation, portfolio accounting, custody of non-collateral assets and cash management
- replace passive cash management (often entrusted to prime brokers or handled in-house) with active cash management (performed by an independent third party)
Coming as they do from knowledgeable and accomplished industry experts, they provide impartial guidance on the right way to manage cash. To assist fund managers in performing thorough and comprehensive due diligence on the cash component of invested monies, Horizon Cash Management has developed the Due Diligence Guide to Cash Management guide.
The Due Diligence Guide to Cash Management encompasses more than 50 questions about cash management and covers:
- Organization and Structure
- Assets and Clients
- Investment Process and Portfolio Management
- Risk Management
- Reporting and Reconciliation
- General Questions
These questions have been drawn from numerous meetings and conference calls with managers and investors who represent a variety of funds that reflect all strategies and sectors.
Download the complete Due Diligence Guide to Cash Management (PDF) by Horizon Cash Management
Horizon Cash Management is an investment advisor specializing in active, efficient cash management tailored to the individual needs and requirements of clients that include managed futures funds, hedge funds, family offices and institutional investors worldwide. If you have questions or to learn more, visit www.horizoncash.com or contact us at info@horizoncash.com / 312.335.8500.
